Premiums and Benefits for Qualified Long-Term Care Insurance Policies

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) provided favorable treatment of premiums and benefits for qualified long-term care insurance policies. The HIPAA added Sec. 7702B(a)(1), which generally treats a long-term care insurance contract as an accident and health insurance contract. Therefore, a corporation can deduct long-term care premiums under Sec. 162(a) as an ordinary and necessary business expense.

The dollar limits of long-term care insurance premiums addressed under Sec. 213(d)(10) apply only to individuals. Therefore, a corporation can deduct long-term care premiums without any dollar limit. In addition, under Sec. 106, an employee is not taxed on the fringe benefits.

The following examples illustrate the tax treatment and benefits for qualified long-term care insurance for tax year 2000 purchased by individuals, C and S corporations.

Example 1: I, a 65-year-old individual, purchases a qualified long-term care insurance policy with an annual premium of $3,000. He also has $5,000 of unreimbursed medical expenses and $50,000 of adjusted gross income (AGI).

The deductible medical expenses threshold is 7.5% of AGI. In addition, qualified long-term care premiums are deductible as medical expenses subject to the following dollar limits based on an attained age before the close of the calendar year:

The amount that I can deduct as a medical expense deduction on Schedule A is computed as follows:

Example 2: The facts are the same as in Example 1, except a C corporation purchases the long-term care insurance policy.

The corporation may deduct the entire $3,000 premium as a reasonable and necessary business expense under Sec. 162 (the individual limits do not apply).

Employer-provided qualified long-term care insurance premiums are excludible from an employee's income under Sec. 106. The HIPAA contains no provisions requiring nondiscrimination in employer-provided plans. Therefore, the employee may exclude the entire premium from taxable income, despite the fact that the plan is discriminatory and the premium may be in excess of what would have been deductible had the plan been purchased personally.

Example 3: The facts are the same as in Example 1, except an S corporation purchases the long-term care insurance policy.

If a participating employee does not own more than 2% of the S stock, the entire premium paid on behalf of the employee is deductible by the corporation and is not includible in the employee's income.

If the participating employee owns a more-than-2% interest, he is considered a self-employed individual. Therefore, the $3,000 premium is deductible by the corporation and is includible in the shareholder's gross income. For 2000, $1,320 (60% of the eligible premium) may be deducted "above the line" as a self-insured medical insurance deduction on the shareholder's individual return, and the balance of the eligible premium ($880) becomes a personal medical expense.

From Joseph R. Ricchezza, CPA, New York, NY